Archives for November 2015

Manila’s just-completed Asia Pacific Economic Cooperation (APEC) was a tale of two summits. The official one centered on trade. The unofficial one focused on the South China Sea.

Ambiguities over China’s nine-dotted line is hindering development of South China Sea oil and gas supplies. Joint Development Zones connected to multilateral infrastructure could solve this problem.Source: US EIA, Klaudia & Sandler, 2005, Grenatec

The official summit agreed on the need to fight terrorism, enhance economic growth, reduce poverty and increase climate change resiliency. That part of the meeting went pretty much according to plan.

APEC members agreed to undertake a year long study of the proposed Free Trade Area of the Asia Pacific (FTAAP) and to consider it at the next year’s meeting in Peru. This will shelve, at least for another year, competition between China’s vision of a Regional Economic Comprehensive Economic Partnership (RCEP) and the US-backed Trans-Pacific Partnership (TPP). Ideally, both can be folded into an even larger FTAAP.

Unofficially,the huge political gulf between the US and China over the South China Sea was on display.

US President Barack Obama called upon China to cease island building in the South China Sea. Obama visited a Philippine Navy frigate, emphasized the US-Philippine mutual defense treaty and pledged $250 million in military assistance to US allies in Southeast Asia.

China claimed the US was fanning geopolitical tension and repeated its demand South China Sea territorial disputes be handled bilaterally. Because of China’s economic clout, this provides Beijing the upper hand.

China had insisted South China Sea territorial issues be left off the official agenda. To be certain it was, China foot dragged on confirming President Xi Jinping’s participation in the summit until the last minute.

As China and the US sparred over the South China Sea outside the official sessions, smaller economies like Vietnam, Malaysia, Indonesia and the Philippines could do little but watch the fireworks and handicap the two contestants. All of Southeast Asia’s countries want Chinese investment and trade. But they also want the US to protect them from China’s military.

All Southeast Asia’s countries worry about China’s unilateral land reclamation efforts in the South China Sea. These fears are multiplied by China’s characterization of any opposition to the activity as inflammatory.

Particularly inflammatory in China’s view is the Philippines’ pending appeal over China’s South China Sea island building to a United Nations arbitration tribunal, which should rule next year.

The Philippines may be joined by Vietnam and Indonesia in making such appeals. For its part, Japan has indicated it could also do so over disputed islands north of Taiwan claimed by both Japan and China. While China supports the Law of the Sea under whose auspices the tribunal exists, China says it won’t recognize any ruling that goes against it.

That’s because China claims it’s being misunderstood. China says construction of military airstrips on uninhabited South China Sea sandbars in disputed waters is a ‘humanitarian’ gift to the region that improves maritime safety. But China fails to specify how. That, in turn, makes the claim ring hollow.

If, for instance, humanitarian aims are China’s sole aim –– why doesn’t China instead dispatch the infrastructure equipment and personnel to building robust coastal infrastructure in low-lying, highly-populated areas of Southeast Asia? Applying this logic makes it a bit hard to fathom the Chinese argument that protecting uninhabited sandbars is more ‘humanitarian’ than saving human lives.

China insists anyone who poses such questions inflames tensions. Given this kind of backdrop, China has some justification for feeling misunderstood.

The result is that South China Sea territorial tensions are unlikely to go away anytime soon. The US will provide military assistance to its allies like the Philippines, while China will plow ahead with its humanitarian sandbar building.

Developments that may change this could be a critical mass of regional opposition.

For instance, Vietnam and the Philippines could deepen military ties. Taiwan, which doesn’t agree with the Nine-Dotted Line, could get more vocal about it. Japan could forge deeper military relationships in the South China Sea.

If China’s big prize in the South China Sea turns out to be uninhabited islands with no global political legitimacy and a frozen conflict, China will have expended a lot of political capital for little if any goodwill gain.

However, there are causes for optimism. All sides could agree to shelve their disputes and agree to Joint Development Areas.

The South China Sea is believed to hold economic resources of oil, gas and, potentially methane hydrates. One explanation for China’s territorial stridency could be her belief these are worth developing. Joint Development Areas agreed with her littoral neighbors would solve all problems at once.

China would get a ‘social license’ in the South China Sea. Southeast Asia’s poorer countries would get a deep-pocketed partner to pay most of the bills in developing these new energy sources. Joint Development Areas have a long history. They exist all over the world. Two exist in the Gulf of Thailand, just to the west of the South China Sea.

The other bit of good news in the South China Sea is that while the politicians squabble, the generals are talking. Both sides clearly realize the risk of conflict. The US and Chinese navies now appear to be making a good faith effort to eliminate the risk of a mishap. During an inaugural defiance sail through disputed South China Sea last month, the US Navy maintained regular radio contact with Chinese Navy ships tailing it.

US Navy ships now dock in China for official visits. Last month, Chinese navy officials gave their US counterparts a tour of China’s only aircraft carrier. Three Chinese Navy ships are expected to dock soon in Hawaii.

These contacts reduce, at the operational level, the risk of a Gulf of Tonkin mishap of the kind that pulled the US into the disastrous Vietnam War in the 1960s.

That’s equal to nearly 10% of the global economy. This money can reinvested in cleaner energy. Stated differently, long-term climate change has been caused by the economic distortions above of dirty energy subsidies and lack of carbon pricing.

These investments won’t represent deadweight losses. They’ll represent efficiency gains. This will come from eliminating the economic drag of distorted carbon price signals that’s created climate change over the last 150 year. The result will be a more efficient, richer global economy.

Prime candidates for some of this $7.5 trillion a year of new investment will be large scale sun and wind as well as large-scale transmission infrastructure to carry these and other energy sources from producers to consumers.

The future revenue streams generated from such investment can contribute to paying the health and retirement costs of an aging global population — a looming future problem that’s been just as badly managed as climate change has in the past.

Applying expansive thinking, therefore, can solve several problems at once.

In coming weeks, APEC and COP21 must make a start in sketching out this future. Done right, properly implemented economic reforms to distorted energy marketscan create path to prosperity for the 21st Century.

Eliminating destructive fossil fuel subsidies, expanding carbon pricing, recycling the trillions into low-emission energy production and building the common-carrier, cross-border energy transport infrastructure to bring it to market solves several problems at once.

The core of the system can be high-capacity, long-dstance, cross-border High Voltage Direct Current (HVDC) power lines of the kind already on display in places like China and Brazil to bring distant hydropower to coastal cities. These same kinds of power lines can in the future deliver sun, wind and other low emission energy sources.

Deeper interconnection can allow asynchronous intermittencies to large cancel each other out. The problem of residual intermittency can be solved by laying properly-constructed gas pipelines alongside the HVDC power lines to provide supplemental backup supplies of natural gas and, more importantly, hydrogen.

Properly constructed pipelines can carry both simultaneously. This helps future-proof the pipeline system against the end of the natural gas transition age when hundreds of billions of dollars of bad investment Liquid Natural Gas infrastructure must be written off.

With a combined pipeline/HVDC system, natural gas can serve as a transition fuel to hydrogen to ‘load balance’ intermittent renewables delivered through HVDC. The beauty of such a parallel system is that natural gas/hydrogen supplies located anywhere along the network can be used to maintain high-capacity utilization of the HVDC power lines. Conversely, surplus electricity transmitted by HVDC can be transformed into hydrogen along the network for storage and later use as needed.

A combined pipeline/HVDC system achieves standardization, storage and future proofing — three desperately-needed economic reforms in the energy industry.

The big loser, of course, would be Liquid Natural Gas —an inflexible, dirty, single-generation technology. The LNG industry owes its existence to distorted energy pricing caused by unpriced carbon emissions and the lack of multi-fuel energy interconnections between national markets.

Eliminating fossil fuel subsidies and applying carbon prices will lead to LNG being replaced with something better and longer-term: efficient, multi-fuel networks.

All this is relevant to APEC and COP21. It speaks to the looming challenges of creating a 21st Century energy economy to replace the economically wasteful and environmentally destructive energy economy of the carbon age.

By 2050, the global economy will be unrecognizable.

Visionaries now see this.

The biggest one may be Liu Zhenya, chairman of Chinese electricity infrastructure state champion State Grid Corp of China. By 2050 Zhenya believes a series of regionally interconnected electricity grids will have created — in effect — a global Internet of energy at a cost of about $100 trillion.

Built out over 35 years, that’s $3 trillion a year. That’s just half the amount per year that eliminating fossil fuel subsidies and applying carbon pricing will yield. That, in turn, allows the other half of the $7.5 trillion saved per from eliminating fossil fuel subsides and implementing carbon pricing to be invested developing and build out new energy generation technologies.

The result is a virtuous circle. The first order calculations above, for instance, leave out second-order benefts like greater energy market efficiency, incraesed supply security, quickened innovation and better price signals.

Bottom line: climate change needs to be viewed as a positive sum economic reform problem in which everyone benefits. The upcoming APEC and COP21 meetings can start the world on this path.

At the Asia-Pacific Economic Cooperation (APEC) meeting later this month , the elephant in the room will be the South China Sea.

Ambiguities over China’s nine-dotted line is hindering development of South China Sea oil and gas supplies. Joint Development Zones connected to multilateral infrastructure could solve this problem.Source: US EIA, Klaudia & Sandler, 2005, Grenatec

And while it’s not on the official agenda, it’ll be very hard to sweep under the rug.

For proof of the sensitivity, look no further than China.

With the meeting just weeks away (Nov 18-19), China still hasn’t confirmed whether Chinese President Xi Jinping will attend.

Despite assurances the South China Sea won’t be discussed officially, it may be hard for China to avoid having the issue come up in bilateral meetings.

That’s because ‘energy resiliency’ IS on APEC’s agenda, and this includes things like deepening cross-border energy infrastructure connectivity. China, of course, supports this.

The reason is that international infrastructure projects now offer a crucial outlet for China’s world-class industrial state champions like State Grid Corp of China.

In China, overseas infrastructure investment is being called, in various ways, the ‘going out’ strategy. It provides much of the rationale behind China’s ‘One Belt, One Road’ slogan. The slogan is aimed at encouraging deeper economic integration in Asia through expanded cross-border infrastructure.

This would be largely built by Chinese companies and funded in whole or part through funding from China’s newly-created $100 billion Asian Infrastructure Investment Bank (AIIB).

The problem with the ‘One Belt, One Road’ slogan is that it tends to include vague infrastructure pathways through the disputed South China Sea.

To date, there’s been little or no explanation of how China’s ‘One Belt, One Road’ pan-regional infrastructure concept fits into China’s territorial claims to the entire South China Sea under its ‘Nine-Dotted Line.’

It’s all looks terribly sticky for China at APEC. since discussion of one naturally segues into discussion of the other. This, in turn, could explain China’s dawdling in confirming Xi’s attendance.

No other APEC member to date has publicly supported China’s Nine Dotted Line claim. Worse, APEC host the Philippines has a pending appeal before a United Nations Convention on the Law of the Sea (UNCLOS) tribunal over the matter.

As a result, Xi will almost certainly attend. But confirmation will likely come only at the last minute in order to discourage grandstanding by others once the commitment is locked in.

Looking at the big picture, none of Asia’s countries benefit from fighting over the South China Sea.

Therefore, a solution lies in exploiting synergies between the needs and capabilities of China and her stroppiest South China Sea neighbors: Vietnam and the Philippines. To see the solution, consider what each side has and what it needs:

China has the capital and the technology to develop new South China Sea energy resources, like deep water methane hydrates. What China needs is a neighborhood (and global) ‘social license’ to do so.

China has the military potential to control the South China Sea, but it needs to avoid conflict with the United States. China also needs access to the Straits of Malacca, which Singapore and Malaysia could deny if China gets too aggressive.

In a ‘worst case’ scenario, Singapore and Malaysia could stymie access to the Malacca Straits to Chinese commercial vessels. This could be done by imposing endless ‘random’ inspections and administrative procedures over Chinese merchant traffic.

Vietnam and the Philippines, meanwhile, have legitimate claims to portions of the South China Sea as strong (or stronger) than any China’s put forward to date. However, both need foreign capital to develop the resources.

Given this, look for use of creative syntax at the APEC meeting that might represent diplomatic code for discussion of Joint Development Areas (JDAs).JDAs exist all over the world. Two exist in the adjacent Gulf of Thailand just west of the South China Sea.

Under a Joint Development Area agreement, disputing national claimants to an offshore area agree to shelve their territorial differences indefinitely while they jointly develop the energy resources. Final territorial determination is postponed until the stakes are lower because the resources have been developed.

Given this, Joint Development Areas agreed between China and her South China Sea neighbors that link offshore oil and gas developments to downstream energy markets gas pipelines and electricity power lines solves several problems at once.

Doing so will increase ‘energy resilience’ through expanding supply. It will create delivery efficiencies though deepening networks. And it will provide a cooperation framework reducing the risk of military conflict.

To date, uncertainty over South China Sea territorial issues has hindered systematic exploration and development of potential new oil and gas in the South China Sea. It’s also hindered efforts to create deeply interconnected energy markets, a consensus goal of APEC members.

Were China to move toward acquiescence to joint development areas, it could open the way for using AIIB funding to build the Association of Southeaste Asian Nations (ASEAN)’s highly promising but long moribund ideas of a Trans-ASEAN Gas Pipeline and Trans-ASEAN Electricity Grid.

Both aim to create an Southeast Asian integrated electricity and natural gas infrastructure in a region with a population larger than the European Union and with a collective GDP that —were it a country —would be the world’s seventh largest.

China’s already has hinted Southeast Asia may be where the AIIB makes its first loan. As such, these Southeast Asian projects would be ideal for building ‘energy resiliency’ and opening the way for deeper China-ASEAN cooperation.

And bedding down all of this would be highly desirable to achieve before next year’s anticipated ruling by a UN tribunal over the Philippines’ assertion that China’s claims to the entire South China Sea violate provisions of the United Nations Law of the Sea.